BROKER BOND UPDATES:
Since the transportation bill became law a few months ago, I have received a lot of calls from brokers who want to understand the implications for their business. The law, dubbed Moving Ahead for Progress in the 21st Century (MAP-21), includes many provisions that affect freight brokers, but the $75,000 bond requirement has been the subject of the biggest controversy.
When concerned clients ask my advice about the new bond, I urge them to calm down. The Federal Motor Carrier Safety Administration (FMCSA) has announced that its target date for enforcement is October 1, so there is still time to prepare and to consider the options.
There is also a lot of confusion and misinformation about the bond. For example, many brokers fear that the larger bond will not be available. That simply is not true. There are sureties that are eager to provide $75,000 bonds to qualified brokers and freight forwarders.
Here are three things you need to know about the bond:
1. For the first time freight forwarders will be required to post bonds. If a company has both broker and freight forwarder authority, two bonds will be required.
2. Carriers that broker loads will be required to obtain brokerage authority and post a bond.
3. Brokers will have to increase the amount of their current bond or trust account.
It is important to understand that surety bonds are completely different from insurance policies. With an insurance policy, the insurance company agrees to pay for defined risks of loss in exchange for your premium payment. The insurance company uses its own money to pay claims. A bond is merely a guaranty, backed by the surety’s financial strength, that the broker will pay legitimate freight bills in the agreed-upon manner. The surety is not assuming risk, because it will use the broker’s money to pay those bills. The underwriting on a bond is based upon the broker’s credit history, reputation, and financial strength. That means the broker’s financial statement is crucial; it must show that the broker has the cash to reimburse the surety if there are any claims against the bond.
Here are three ways for small brokers and freight forwarders to prepare for the underwriting requirements of a $75,000 bond:
1. Talk to your accountant about improving your financial statement to support the $75,000 bond.
2. Provide a letter of credit from a bank.
3. Use the brokerage owner’s personal financial statement to support the bond.
You may find that some combination of these strategies is best for your company. You may also need to consider changing your corporate structure, especially if you are operating as a Sub-S corporation or LLC.
What’s your next step? Meet with a good accountant and a banker to prepare for the surety’s underwriting requirements, so you can secure a $75,000 bond and keep your business on a solid footing.
Mark Yunker, vice-president of business insurance agency RJ Ahmann Company, is an expert in the area of contingent cargo insurance for the transportation industry. With more than 20 years of experience, Mr. Yunker is a consultant to DAT on insurance issues.